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Isabella M. Weber is political economist, an assistant professor of economics at the University of Massachusetts, Amherst as well as the author of a highly acclaimed book, How China Escaped Shock Therapy: The Market Reform Debate (Routledge). Her book, which has won plaudits from Martin Wolf of the Financial Times, the historian Adam Tooze and Harvard’s renowned political economist and China expert Dwight Perkins, details the discussions that shaped China’s historic reforms of the 1980s, and why it ultimately rejected a big bang approach to changing its system. What follows is a lightly edited interview with Professor Weber.

Q: Professor Weber, your book, How China Escaped Shock Therapy, is a fascinating look at how Beijing dealt with economic reforms and international advice in the 1980s. How did you come to focus on this topic?

A: When I started, I was puzzled by the explanations of China’s economic success. There was an emphasis on pure pragmatism, and it seemed implausible to me that such a gigantic social transformation as China’s economic reform would have occurred without intellectual debate, theory or ideas. The broad question I had was: What was the role of economics in China’s reforms? Initially, I was thinking about this in the context of [the global financial crisis in 2008] with the Queen saying, “Economics has failed us.” If economics had failed us and the best in the economics profession had not foreseen the crisis, while China came out of this crisis as a winner with a strong growth trajectory, how could it be that economic research did not play a role? It became clear to me that to understand China’s more recent economic developments, I had to go back to the intellectual foundations of economic reform, the crossroads of the 1980s. 

Can you explain what you mean by economic “shock therapy”?

In the 1980s, China was toying with the idea of “shock therapy.” This was a policy prescription for the transition from a planned to a more market-based economy, and it suggested that in the first instance the chains of command-and-order had to be broken through price liberalization. Shock therapy, of course, had been applied with disastrous effects in various socialist and developing countries, most notably in Russia. As I argue in my book, the decision not to implement a so-called “big bang” policy was crucial for China to develop its own distinctive gradualist reform approach, one that left the core of the old system in place.   

What was the state of the Chinese economy on the eve of the 1980s?

In the late 1970s, China was in a crisis. The crisis raised the fundamental question: What should China’s economic model be? After Mao’s death, China had once more attempted a big push industrialization under Hua Guofeng. This time it was meant to be fueled by foreign technology and investment goods financed by petroleum exports. There had been some significant oil discoveries in the 1970s. And there was a sense that would continue. But this was not the case. So, further pursuing this strategy risked a foreign payments crisis. We have to remember that while China had achieved breakthroughs in public infrastructure, health and education, China was still a very poor country. In 1980, China’s per capita GDP was less than that of Haiti or Sudan, according to the World Bank. So, in the first place, reform was really about development. China’s reformers were worried about solving the basic problem of providing food and clothing. 

By the late 1970s, China had begun to open its economy to the West, but it had not abandoned socialism or the planned economy, right?

Well, already in the 1970s, there was this backtracking from the idea that in Marxist terms you could first revolutionize the social relations of production, and then the forces of production would somehow follow. This led to a reorientation away from Maoism towards a more orthodox historical materialism. And that meant the country had to lay the foundation for economic development and learn from capitalism in a rather broad and comprehensive fashion before it could aim for higher forms of socialism. By 1979, Deng Xiaoping already pointed out that the market is a tool that could be used by both capitalism and socialism. It was not yet the official ideology for China to move towards a market economy; that, of course, only happened in 1992. But there was a pretty universal sense among reformers that China needed a more market-oriented system. 

How did Beijing make that transition?

At the dawn of reform, Deng Xiaoping famously put economics in command, as opposed to politics. But the problem he faced was that economics as an academic discipline had been shattered during the Cultural Revolution. The Institute of Economic Research had been shut down. The most important economists in the country had been sent to the countryside or to the so-called May 7 Schools [during the Cultural Revolution for “re-education”.] So it took some time for the economics discipline to re-establish itself. They had to rekindle the economics profession, really. And it started with exchanging ideas with all sorts of foreign counterparts including the World Bank and people like Milton Friedman; but also Germany’s liberal proponents of the social market economy.

Basically, the big question in the economics profession at the time was: How can we create a new theoretical model for the Chinese economy? How can we re-conceptualize the relationship between the planned economy and the market economy in ways to create a blueprint for a new kind of economic system? And many international economists were brought in, among them Eastern European émigré reform economists. Some of them had been trained in orthodox Soviet economics but had become disillusioned with the Soviet model. In fact, many of them had altogether lost faith in socialism. These exchanges culminated in a reform thinking that emphasized the need to overhaul the system and laid the intellectual foundations for reform proposals in the second half of the 1980s that shared some key characteristics with what came to be called “shock therapy.” 

At the dawn of reform, Deng Xiaoping famously put economics in command, as opposed to politics. But the problem he faced was that economics as an academic discipline had been shattered during the Cultural Revolution.

So China was getting advice on how to transition to a more successful economic model, and hearing lots of different views about the best path to take…

We should think of this period as really a bursting open of minds. China is at that time in a moment of genuine openness about what may come next. China’s leaders wanted to consider a whole spectrum of opinions. So it was incredibly pragmatic — and that pragmatism was essential to understanding China’s economic reforms. And that pragmatism was not anti-intellectual; it involved a very serious use of economic research.

What are some of the key areas for reform at this stage?

Their most pressing problem in terms of poverty and the material living conditions of the masses was agriculture. About 80 percent of the people were still living in the countryside. And so initially, there were experiments that resulted in a dual-track system, where households were allowed to produce for the market while also having to deliver a quota. It was like saying, “As long as you fulfill your core duty, you can do whatever you want [with the rest of your production].” This resulted in a rapid marketization of social relations in the countryside without, however, undermining the urban planned economy in this early stage.

Was this the beginning of a dramatic surge in economic growth in the 1980s?

Yes. And as a result of these reforms, agricultural output exploded in ways that no one could have imagined. For the first time since 1949, the problem of grain production was being considered pretty much solved. And once that was solved, the reforms moved to the urban-industrial planned economy. And in this context, by the mid ‘80s, you get this clash between the idea of redoing the whole system based on a target model or instead using the logic of the agricultural reform where the principle is to unleash a new market dynamic under a dual-track system without immediately changing the core. This had direct implications for the crucial realm of prices. To move the country towards a market economy, neoclassical economics suggested, you have to liberalize prices all at once because if you don’t have free prices that are moving according to supply and demand you cannot have a market economy. On the other hand, in the dual-track system a multiplicity of prices prevail. The metaphor I like to use to illustrate the difference is the [the British board] game of Jenga. One way of thinking about transforming the initial Jenga tower into a different shape is to push it over and use the stones and build a new tower. Another way is just how you play the game of Jenga, that is to remove the blocks that are loose, and which can be removed without the whole tower falling apart. But unlike in the actual game, the spaces left open are now filled with new structures, that is market relations. Initially the tower’s structure is kept in place but eventually the tower as a whole is transformed.

Is this where the debate emerges about adopting a form of shock therapy to push China more rapidly towards a market-oriented economic development model? 

The idea for a big bang price reform emerges from exchanges with neoclassical economists and is reinforced by neoliberals like Milton Friedman. In contrast the gradualist approach grows out of reform experiments and economic research conducted by economists who were initially involved in agricultural reform. This was an alliance of young reformers who returned from the countryside after the Cultural Revolution. Crucially, the young economists like Chen Yizi, Wang Xiaoqiang and many others were supported by Zhao Ziyang [one of China’s top leaders in the 1980s].  

And the idea of shock therapy was basically to tear down the old tower in order to make space for the new. You have to destroy the core of the planned economy in steps, or ideally at once, in order to make space for market relations to emerge like a phoenix from the ashes. This is the logic of shock therapy. And the basic idea is very much on the table by the mid ‘80s. In fact, in 1986, [Premier] Zhao Ziyang, who up to that point had been pursuing the so-called dual-track system, changed his mind and moved toward the idea of a big bang in price reform. Zhao took the initiative and set up the so-called “program office,” which was to come up with one big program for reform that was meant to combine price, tax and wage reform in order to get prices right and thereby create the conditions for a market economy in one big go. This was the exact opposite logic of keeping the core intact since the idea was to start from the most essential commodities like steel. Instead of keeping the core going, they say the most important thing is to change the core.

Did Zhao Ziyang favor a mode of “shock therapy” throughout the 1980s?

Zhao Ziyang was notorious for going back and forth between the two theories of reform. He was initially a champion of the dual-track system. In fact, in 1984 the dual-track system became national policy. But the dual-track was no magic bullet. It did create a reform dynamic but it also created a considerable degree of chaos with two systems operating synchronously, and corruption became a big problem. So then, out of this re-established economics profession in China you have these attractive ideas that you could have a quick, clean solution that is scientific in the sense that it’s based on mathematical models. So Zhao Ziyang took the initiative to set up this program office.

In the book you write that during the visits to Hungary and Yugoslavia, they heard from officials and reformers that there could be problems with liberalizing prices, and spillover effects if the prices of key sectors like steel are freed up. And this started to change the minds of Beijing leaders, right?

Yes, so the delegation sent to study the reforms later warned Zhao Ziyang that if he implemented wholesale price liberalization it could lead to inflation and undermine the social and political stability needed for economic reform. And Zhao Ziyang, who had relied on this group for the agricultural reforms which were the critical breakthrough and thus trusted them, took this very seriously and basically changed his mind. He stopped the attempt at a big bang, which is the first step of “shock therapy.” 

As you say, there were also economists of different stripes warning that the dual-track system or gradualist approach was risky and would create opportunities for corruption. Why did China listen to the warnings that shock therapy could be more disruptive? 

It’s critical to recognize that the dual-track system fostered corruption but it also unleashed rapid growth. So they had a choice between one big package approach that seemed clean but was extremely risky or a system that was far from perfect but working well enough. The dual-track system left open the possibility to take reform step-by-step, that is feeling the stones to cross the river, and unleashing a new dynamic at the margins of the system, just like with agriculture. So ultimately, it was fear of the kind of instability that shock therapy would have risked and the fear that one big move could go wrong. 

This seems to tell us something about China’s development today, does it not? It seems that for much of the past two decades, China has favored a gradualist approach with experiments on the margins. The reforms have for some been too slow, but perhaps from Beijing’s standpoint, they’ve been reluctant to dismantle all aspects of the planned economy, the state owned enterprise system, etc. out of fear it might lead to greater dislocation…

Right. And this makes it even more surprising that in the 1980s, they came close to trying such a big bang approach. But throughout the 1990s and 2000s, reform did not stay at the margins but moved into the core of the system, yet it still largely followed an experimentalist and gradualist approach. This confirms my thesis that in the ‘80s, the path of gradualist experimental reform was set. However, in the ‘80s it was also still an open question how China would marketize. Once the reform trajectory was established, it became self-reinforcing in such a way that visitors to China in the early 2000s could not tell that it could have been otherwise. If we go back in history, though, and look at the debates of the 1980s, we see that things could have gone very differently. We have to remember that in ‘88 it was Deng Xiaoping himself who took the initiative towards very radical reforms, and basically employed the whole rhetoric of what we think of as shock therapy. Deng Xiaoping then said it would be better to take short term pain than to endure long-term pain; sometimes we have to take risks and we have to take them head on; Deng talked about crashing through the gate of price reform; he really employs this logic that contrasts with what you just said of the Chinese reform approach.

Throughout the 1990s and 2000s, reform did not stay at the margins but moved into the core of the system, yet it still largely followed an experimentalist and gradualist approach. This confirms my thesis that in the ‘80s, the path of gradualist experimental reform was set.

Is it true that Deng was pushing for more radical reforms while Chen Yun, another senior leader, was more conservative and calling for more state control with the theory of the “bird cage” economy? 

My reading of ‘88 is that basically reform reached a certain impasse where you had important breakthroughs in the early years of reform and yet by the late ‘80s it became clear that reform did not stand to benefit everybody. It became clear that inequality was rising rapidly, and that corruption was a problem. There was a danger that reform was taking on a dynamic that was hard to control. And in this context, the so-called “conservative” faction, even though they supported the early reforms, became skeptical about how far those reforms should be pushed. Or, to go back to the analogy of the market as a tool, it becomes clear that the market is a tool that can take on a life of its own. It’s a Faustian moment. The pushback both from the more “conservative” faction within the leadership, as well from those who think reform is not radical enough, becomes more and more salient. And Deng has his back against the wall and tries to rescue the legacy of market reforms by aiming to push ahead.

Deng saw the backlash against the market become too strong and he tried to push against it. In fact, he did so at a moment when prices were already rising. And even economists like Wu Jinglian, who were arguing for package reform, began to say in ‘88 that the macroeconomic situation was not stable enough to go ahead with comprehensive price reforms. Whereas the other side continued to say, “Let’s not do such a brash kind of reform.” So Deng was acting against the advice of economists from both sides in the market reform debate. So this, I think, underscores that Deng Xiaoping really saw a political need to find a way out of the deadlock, which then, of course, is a disaster and lays the economic foundations for what happened in 1989. After the announcement in the summer of 1988 that comprehensive price reform would be implemented, people across the country reacted with panic buying and there were bank runs. Then China’s leadership reversed the reform course. The combination of inflationary pressures and a political tightening of control proved explosive. As such, the escape from a big bang in 1988 is part of the story of the lead-up to the protests and crackdown in 1989.

After the pro-democracy crackdown in ‘89, what happened with economic reform?

Ironically, after ‘89, those people who were in favor of the dual-track system largely stood loyal to Zhao Ziyang, and some of the more critical economic researchers kind of disappeared from the scene. Whereas some others, who were very quick to turn around and denounce Zhao Ziyang, came out on top. And in the 1990s, this neoliberal faction became more influential. But the dynamic of the system shifted. While we had some radical reforms on prices and privatization in the ‘90s, we didn’t have a complete overhaul of the system in shock therapy-style. Even today you see a split between different reform factions that is to some extent analogous to the 1980s even though the context has radically changed, especially in recent years. If you focus on the non-commanding heights, you’ll see a very deregulated market. And if you focus on the commanding heights of the economy, you’ll see a very activist [Chinese] state, with direct state participation in the economy including state market-participation with the aim of price stabilization and regulation, for example, in the energy sector.

Many in the West have been inclined to think that China’s path to economic reform is a gradual move towards a market system that resembles what we know in the U.S., but that’s not what we’re seeing is it? And it’s never really been aimed at creating American style capitalism in China, has it?

It’s important to recognize that marketization of China did not mean wholesale westernization. It meant importing certain aspects of the American system. It meant learning from capitalism. In many ways, you can see how the Chinese have remodeled aspects of their system, based on the practice in the U.S. or in Europe. However, this whole logic of using the market as a tool, or using certain management techniques, certain institutional capacities that are being imported from other contexts into the Chinese system should not be equated with an overhaul of the Chinese system as a whole into American-style capitalism. There has long been a concern in China with maintaining sovereignty over their path; it’s kind of a constant theme. We can probably go back even further in time, but certainly in the context of reform and opening from the late 1970s until today. It is, “We want to learn from you. We want to borrow from you. We want to integrate the good aspects of your system into our system and our system into the world economy. But this does not mean that we want to become you.”   

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